Economic Value of Google

Hal VarianChief Economist

Google

Value of Google

What I'm not going to do Counterfactual estimate of world without Google Alternative histories are like playing tennis with the

net down What I am going to do

Attempt to quantify value of Google advertising and search in the US

Ads: value provided to advertisers, publishers, charities Search: time saved by users

Inherently back-of-envelope

Value of Google to advertisers

Easy to determine how much advertisers pay, but need a model to estimate the value they get

Standard model: profit maximization = value of a click = number of clicks = cost of clicks

Goal of advertiser Maximize Can include impression value, lifetime value, etc.

xv

vx−c x

c x

What are alternative? Suppose advertiser is getting clicks now and

spending It could reduce its bid, get fewer clicks, , and

spend less If it is profit maximizing Therefore value per click must be greater than

the incremental cost per click

v≥c x −c x x− x

vx−c x ≥v x−c x

x

c x

x

x

c x

Intuition

I could cut my bid and move down Save some money Lose some clicks

If I don't want to move down, then the clicks I would lose must have a higher value than the money I would save

(Similar inequality for raising bid and moving up)

But how do you know how many clicks you would get at new bid?

If you are an advertiser you can experiment Or you can use Bid Simulator

How does Bid Simulator work?

If you decrease your bid, you move down in the rankings

We can estimate how many clicks you get with same ad quality at the lower position

We see how much you have to pay based on auction rules

Get a pretty good estimate of “click-cost curve”

Rest of argument

Get a lower bound on value from change in costs over change in clicks,

Plug into profit formula to get lower bound on profit at current operating position:

Calculate value/cost ratio value/cost ~ 2 ROI: (value – cost)/cost ~ 100%

How can it be so large?

vx−c x v

v

v x /c x

Go back to auction

If auction is oversold (more bidders than slots) then competition for slots is intense and price is pushed up close to value

If auction is undersold (more slots than bidders) then competition is much diminished Last advertiser pays reserve price Other advertisers pay just enough to beat the buy

below them Prices are a huge bargain

In practice

Only about 1/3 of pages have ads Average number of ads on those pages is

around 4 So for most pages, competition is not intense Virtually all advertisers would like to get more

clicks at the same CPC they are paying now Constraint is the number of searches on their

keyword

Search clicks

What value does Google provide to its advertisers? Net value of clicks ~ cost of clicks Organic clicks are about 5 times as large as ad

clicks Organic clicks may be worth a bit less in terms of

conversion value Bottom line

Google advertisers get back about 7 times what they spend in value of ad clicks + organic clicks

Other contributions to value

Publishers get AdSense revenue share of 67% of the ad revenue

Non-profits get value of search services provided to them

Bottom line Total value in US to advertisers + publishers +

nonprofits = $54 billion

Value of search to users

How much is search worth to users? How much would you pay to give it up? See “A Day Without a Search Engine” by Yan

Chen et al at Univ of Michigan Hire students to answer questions using 1) Google,

2) Library Compare quality of answers and time to answer Bottom line: search engine has same or better

quality answers, saves about 15 minutes per search (once you are in library)

Answerable questions from queries

Answerable

[where in world is swine flu] → Is there a map where I can see where swine flu has been diagnosed?

[washington state scholarships] → What scholarships are offered in the state of Washington?

[statistical analysis] → What are common methods for performing statistical analysis on a dataset?

Not answerable

[Tv s hows on internet]

[Technet]

[TEACHER DAY MYSPACE COMMENTS]

Details

2515 searches, yields 1420 (= 56%) that are “answerable using library”

After duplicate elimination, end up with 356 searches Classified into Factual, Source, Web, Other 105 Factual and 251 Source converted to questions Library: reference room or library stacks; can consult

reference librarian two times Rate answers using 3 raters and take average

Summary

99% answered in web treatment, 90% in library treatment

Web searches averaged 7 minutes, library searches averaged 22 minutes

Top library sources: electronic card catalog (72%), ready reference (13%), telephone directory (9%)

Quality of answers is about the same Students prefer web search

Back of the envelope calculation Summary

Time using library treatment = 22 + travel Time using web = 7 Questions per day now = 1 per capita Answerable questions per day = ½ per capita Questions per day then = close to zero

Problem When getting answers was expensive we asked few

questions Now that getting answers is cheap we ask a lot of

questions

Demand curve for questions

minutes

Questions per day

22+

7

1/2

Consumer surplus

minutes

Questions per day

22+

7

1/2

Area = base x height/2 = 15/4 = 3.75 minutes

Convert to dollars

Per person Average hourly earnings = $22 Save 3.75 minutes per day = $1.37/day 365 days in a year = $500

How many users? 130M people employed 130M x 500 = $65B 300M population 300M x 500 = $150B

Other work

Litan and Varian Estimated contribution of Internet to productivity in

US using survey responses Jacques Bughin IAB/McKinsey

Uses “contingent valuation” techniques to estimate value at home of ad-supported applications in Europe + US: $100 B

Boston Consulting Estimates contribution of internet industries to GDP

in Europe

Summary Value to advertisers + publishers ~ $54B Value to users in time saved ~ $65B Value of ad-supported applications in US ~ $25B Leaves out

Cost of trips to library Unanswerable searches Value to non-employed Value of better matched purchases Entertainment value Improved decisions Etc, etc, etc.